Shares of Robinhood have slid downward after reaching a temporary peak above $80.
The stock is now sitting very close to its original IPO price above $38.
The core thesis for Robinhood revolves around capturing greater wallet share from a millennial base that is gaining wealth.
One key risk for Robinhood is that it is heavily reliant now on active crypto trading, which may suffer if crypto hype dies down.
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Cindy Ord/Getty Images Entertainment When Robinhood (NASDAQ: HOOD ) went public earlier this year, I stayed out of the fray. As a general rule, I don’t invest in heavily hyped IPOs anywhere close to the IPO date, especially when those IPOs pop on Day 1 (the only recent IPO I bought on the first day of trading was Palantir (NYSE: PLTR ), and only because it sank on Day 1 due to fears of insiders unloading). I watched as Robinhood rallied very quickly to $80, and then over the past several months give up all of those gains to end up very close to the original IPO price. After digesting the market moves as well as Robinhood’s very first quarterly earnings release since going public, I’m now ready to pull the trigger and go long on Robinhood. Data by YCharts Robinhood is a company that needs no introduction at this point. The company has become synonymous with the wild-casino reputation that the stock markets have taken on over the last year, as bored investors waded in during the pandemic (many pundits have accused traders of treating investing akin to gambling). Yet as well-known as Robinhood is, its revenue composition may surprise the average investor (for example, it’s well known that Robinhood makes money from “PFOF”, or payment for order flow – which is the fee that Robinhood earns from routing transactions to a broker-dealer). But did you know that now, the majority of Robinhood’s revenue actually comes from cryptocurrency trading? Also, despite its reputation for growth, did you know Robinhood was profitable – at least, on an adjusted EBITDA basis?
All in all, I’ve surveyed the risks and opportunities in this stock and am bullish on the name.
The bullish case for Robinhood, in my view, rests on the following factors: It is getting a younger generation of investors early, with the hopes that it becomes their main investment platform. Robinhood hopes to “grow” alongside its user base – as its millennial user base ages and enters their prime earning years, Robinhood hopes to become their primary investment vehicle of choice. I wouldn’t be surprised if over time, Robinhood offers managed account services (similar to offerings that Morgan Stanley (NYSE: MS ) and Goldman Sachs / Marcus (NYSE: GS ) currently offer). Its account balances are growing at a much faster pace than user growth.
User growth remains fierce. It is adding users at a lightning pace, thanks to the explosion in investing’s popularity since the pandemic. Adding crypto capabilities last year also helped Robinhood dramatically expand its revenue base. Other monetization avenues like Robinhood GOLD, as well as interest on cash balances, continue to be tertiary sources of growth for Robinhood.
Profitable. Economies of scale have tilted it toward profitability on an adjusted EBITDA basis.
We note that it isn’t trading at crazy expensive valuation multiples, either (at least not for an overhyped recent IPO). At current share prices near $39, Robinhood has a market cap of $33.87 billion. After we net off the $5.08 billion of cash and $5.19 billion of convertible debt on It’s June balance sheet, plus add in the $1.90 billion of expected net IPO proceeds in July that didn’t hit the June balance sheet, the company’s resulting enterprise value is $32.08 billion. For FY22, meanwhile, Wall Street analysts are expecting revenue to grow 37% y/y to $2.77 billion, giving a valuation of 12.2x EV/FY22 revenue. Given how bloated other growth stocks are trading, Robinhood isn’t trading at too crazy of a multiple for expected ~40% growth next year.
In short – there are a number of reasons to be bullish here. Take the dip as your entry opportunity. It’s growth pace is quite impressive, and comes with unique expansion opportunity as its clients grow wealthier
It is a premier growth stock, and in the grand scheme of the whole world of investing, its penetration is still quite low. As of the end of Q2, […]